Why is it that so many people are bad at the game of Monopoly?
Many just buy properties at random instead of nailing down a monopoly as quickly as possible to drive opponents out of the game.
I think it is because we are taught at a tender age that tycoons adept at cornering markets are greedy bad guys. This belief is compounded when we go to college and economics professors rant about evil monopolies and the need to break up and “regulate” the free market.
Apparently Carlos Slim — the wealthiest tycoon in the world, according to Forbes — never studied economics.
Carlos Slim’s fortune was built on the back of Mexican telecom monopolies, and — as a hobby — he bailed out the New York Times.
Companies controlled by Slim have captured 80% of Mexico’s telephone lines, 70% of the cell phone market, and account for an incredible 34% of the value of the country’s entire stock market.
Maybe monopolies aren’t all that bad? After all, famed investors from Getty to Buffett owe much of their fortunes to monopoly situations.
A Quick 33% Gain
Lasting monopolies may be tough to find in America, but there are plenty of them in international markets.
Why? Well, the best way to convince government regulators to protect your market is to be owned by the government itself. And there are many of these monopoly-like state-owned and controlled giants in overseas markets.
The poster country of this “state capitalism” is China, and one high-profile monopoly is China Mobile (NYSE: CHL). The government’s 70% ownership stake is a strong incentive to protect the company’s dominant market position.
So despite my strong personal distaste for state capitalism, I added CHL to my portfolio in April, and it is up 33% since then.
Now is a good time to look at China Mobile, as the Chinese market is seemingly coming to life after falling 10.9% over the last five years. China Mobile’s trump card is a $67 billion stockpile of cash reserves ($16 per share) that is sure to make even the most intrepid of its competitors cower (if it doesn’t buy them out first).
CHL is also rolling out a 4G network, and in one quarter, it picked up 1.34 million users. Available now in 16 cities, the 4G networks will expand to 340 cities by end of 2014.
One month since the iPhone 4S went on sale in China through a CHL partnership with Apple, 1.2 million pre-orders have been booked, with 16 million sales expected by the end of the year.
The stock is trading at eight times trailing earnings, and book value is $32. This valuation represents 50% of peer average and S&P 500. A dividend of 4.6% gives support and has grown 500% in the last decade.
The More, the Better
Another monopoly idea is Saneamento Basico do Estado de Sao Paulo (NYSE: SBS), the largest water utility in Brazil.
Majority owned by the state of Sao Paulo, SBS provides water and sewage services to over 25 million people in 365 of the 645 municipalities in the state of Sao Paulo.
I like SBS for three reasons…
First, the company has plenty of room to grow in Sao Paulo, in other regions of Brazil, and even in neighboring countries. Sao Paulo has a population over 40 million and represents 30% of Brazil’s total economic output.
Second, the stock has maintained a stellar record over the past decade, with an annual earning-per-share growth rate of just over 19%.
But it also presents investors with good value right now, after a 20% pullback over the last month leaves it trading at book value and only seven times trailing earnings.
Third, as a utility, SBS offers a nice 3.82% dividend yield.
My view is the more monopolies you have in your portfolio, the better.
Until next time,
Carl Delfeld for Wealth Daily
